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July 4, 2013

Alicia Munnell: Make 401(k) Auto-Enrollment Mandatory

Participation rates have stalled, and ‘encouragement’ only goes so far, Center for Retirement Research says

Will retirement saving soon go from opt-in to opt-out?

A recent post from ex-Boston Globe reporter Kim Blanton on the Center for Retirement Research’s Squared Away blog noted that seven years after Congress encouraged employers to automatically enroll their workers in the company 401(k), “the retirement fix has run out of steam.”

Blanton’s blog, housed with the center at Boston College, recalled how corporate America “rushed in to adopt the feature in their 401(k) plans after the Pension Protection Act (PPA) made auto-enrollment more attractive by giving employers that used it a safe harbor from non-discrimination rules governing their benefits.”

Immediately after the PPA provision became effective in December 2007, employee participation in 401(k)s increased. But since that initial bump, it’s been virtually flat for years, the center claimed, and pointed to the following stats:

In 2008, participation increased to 73% of all employees in workplaces that offered 401(k)s, up from 68% in 2007, according to Vanguard Group.

Fast forward to 2011: participation was 74%. It has barely budged. (Last year, participation was 68%, but Vanguard said past experience indicates this figure will rise to roughly the same level when all of its clients turn in their data).

“The concept clearly works–if it’s adopted,” Blanton wrote. "But enough time seems to have passed that we can safely declare that the employers that were going to adopt auto enrollment already have. There’s little reason to expect any great improvement in participation rates in the future.”

Blanton appeared to lay the groundwork for a proposed solution she nonetheless failed to name. The post concluded with an open-ended (and curiously-timed) question: what now?

In order to make 401(k)s work better, the PPA should be changed to require all 401(k) plans to adopt annual auto-enrollment for their entire work force, Munnell, the center’s director, argued.

“Auto-enrollment deferral rates should be set at a meaningful level and be accompanied by annual auto-escalation in the deferral rate,” she concluded. “In other words, the time has come to make the automatic provisions mandatory components of 401(k) plans.”

Retiring senator Tom Harkin, an Iowa Democrat, plans to introduce legislation in 2013 to require auto-enrollment in some form, but thus far has not done so.